Motion To Dismiss Granted For Failing To Adequately Plead Causes Of Action
In re: DBSI, Inc., Case No. 08-12687 (PJW); Zazzali v. Wavetronix LLC, et al., Adv. Case No. 10-55963 (March 4, 2011) (J.Walsh)
The trustees of the DBSI Estate Trust and the DBSI Litigation Trust (collectively, the Trustees) filed counts, set forth in the Complaint, against the Individual Defendants alleging theories including fraudulent conveyances, personal guaranty, breach of fiduciary duties, unjust enrichment and breach of contract concerning the DBSI enterprise’s business activities and specifically, those activities relating to DBSI’s investment in technology companies.
The Complaint alleges that the investments were structured as loans from Stellar Technologies LLC (“Stellar”), a holding company majority-owed by DBSI Inc. (“DBSI”) and that these unproductive investments benefitted only the DBSI insiders by way of tax advantages that otherwise would have belonged to the DBSI companies. During the four years prior to the petition date, DBSI transferred over $10 million to Wavetronix LLC (“Wavetronix”) through a DBSI affiliate, DBSI Redemption Reserve (“DRR”). Stellar owned approximately 60% of Wavetronix and defendants David Arnold (“Arnold”) and Michael Jensen (“Jensen”) owed the remaining 40%. The individual defendants include Arnold, his wife Linda and Jensen (collectively, the “Individual Defendants”). A primary issue in this dispute was whether the funds transferred through DRR were capital contributions or loans to Wavetronix. The Trustees alleged that the transfers were loans. The Individual Defendants moved to dismiss the Complaint as failing to adequately plead any of the causes of action against them. The Court granted the motion.
Discussion:
The Court dismissed each of the causes of action against the Individual Defendants. The Trustees were permitted to refile the Complaint as to the fraudulent conveyances (counts 1-6) and counts 15 (breach of fiduciary duties) and 16 (unjust enrichment). With regard to alleged fraudulent transfers, the Court cited AstroPower Liquidating Trust v. Xantrex Tech., Inc. (In re AstroPower Liquidating Trust), 335 B.R. 309, 333 (Bankr. D.Del. 2005) to require that the Complaint must set forth facts with sufficient particularity to apprise the defendants fairly of the charges made against them so that they can prepare an adequate answer. The Plaintiff, through the Complaint, must identify one of the following four factors: 1) the date of the transfer, the amount of the transfer, the name of the transferor, and the name of the transferee. See Giuliano v. U.S. Nursing Corp. (In re Lexington Healthcare Group), 339 B.R. 570, 575 (Bankr. D.Del. 2006). The Complaint failed to identify any transfers made to the Individual Defendants or for their benefit to sufficiently plead fraudulent transfer actions.
The Court then turned to the remaining claims. With regard to the alleged breach of the personal guaranty (count 14), the Court reviewed the language set forth in the guaranty and determined that it covered claims made on or prior to December 31, 2008 and expired without any claims having been made during the duration. As such, the count was dismissed with prejudice. With regard to an alleged breach of fiduciary duty (count 15) and unjust enrichment (count 16), the Court concluded that the Trustees failed to provide any specific allegations. Finally, the Court dismissed count 17 (breach of operating agreement) with prejudice based on the language of the operating agreement that precluded Arnold or Jensen from being deemed delinquent.
